Amortisation

Published Friday 24 July 2026

Table of contents

• What is amortisation?
• Why asset amortisation matters
• How amortisation works
• How to calculate amortisation
• Four common methods of amortisation
• What can and can't be amortised
• Amortisation vs depreciation
• Simplify asset amortisation with Xero
• FAQs on amortisation
• Related terms
• Learn more about amortisation

Key takeaways

• Amortisation spreads the cost of an intangible asset across its useful life, so the expense matches the years the asset earns its keep.
• The word also describes paying off a loan through regular instalments that cover interest and the principal.
• Recording amortisation as an expense lowers your reported profit, which can reduce the tax you owe.
• Under IFRS, you amortise intangibles with a finite life, while indefinite-life assets like goodwill are tested for impairment instead.

What is amortisation?

Amortisation is the process of writing off the cost of an intangible asset over its useful life. The term has a second meaning too: it can describe paying down a loan through scheduled repayments.

Asset amortisation applies to things you can't touch, such as patents, trademarks and licences. Loan amortisation applies to debt, where each repayment chips away at both the interest and the amount you originally borrowed. This page focuses mainly on the asset sense, since that's where the accounting work usually sits.

Why asset amortisation matters

Amortisation lets you match the cost of an intangible asset to the years it actually helps your business, rather than taking the full hit in one go. That gives you a truer picture of profit and keeps your small business accounting in step with how the asset is used.

Say you buy a patent for R100,000 and it has a useful life of 20 years. You'd amortise R5,000 each year for 20 years, spreading the cost evenly instead of recording R100,000 as an expense the moment you bought it.

How amortisation works

Amortisation touches two of your core financial statements. On the balance sheet, the intangible asset's carrying value drops each year as you record the amortisation, much like accumulated depreciation reduces the value of physical assets over time.

On the profit and loss statement, the yearly amortisation shows up as an expense, which lowers your reported profit for that period. Keeping clear accounting records of each entry makes it easier to track the asset's value and prove your figures later.

You can read more about each statement in our guides to the balance sheet and the profit and loss statement.

How to calculate amortisation

To work out amortisation, you need a few key figures about the asset. Once you have them, staying on top of the numbers is far simpler with tidy small business bookkeeping. You'll want to know:

• the initial cost, which is what you paid to acquire the intangible asset
• the useful life, which is how many years the asset is expected to bring value
• the residual value, which is what the asset may be worth at the end of its useful life

The most common approach divides the initial cost, minus any residual value, by the useful life to get the amount you write off each year. If you're unsure how the rules apply to a specific asset or how amortisation affects what you owe the South African Revenue Service (SARS), a qualified adviser can help. You can find one through the Xero advisor directory.

Four common methods of amortisation

There's more than one way to spread an asset's cost, and the method you choose affects how quickly the expense lands. Here are four common methods and how each one works:

1. Straight-line method: you write off the same amount every year. A R150,000 asset with a useful life of 15 years is amortised at R10,000 a year.
2. Declining balance method: you apply a fixed rate to the asset's remaining value, so the expense is larger early on. A R10,000 asset at 30% is amortised R3,000 in year one, then R2,100 in year two on the remaining R7,000, and so on.
3. Double declining balance method: you accelerate the write-off using a rate of 2 divided by the useful life. A 5-year asset gets a rate of 40%, applied to the reducing balance each year.
4. Annuity method: you base the amortisation on the income the asset generates over time. It's the most complex of the four and suits assets tied closely to earnings.

What can and can't be amortised

Not every intangible asset gets amortised. The deciding factor is whether the asset has a finite useful life or an indefinite one. You can amortise finite-life intangibles, including:

• patents that expire after a set number of years
• trademarks with a limited registration period
• copyrights that run for a defined term
• licences granted for a fixed period
• some software with a limited useful life

Under IFRS, specifically IAS 38, intangibles with an indefinite useful life aren't amortised at all. Goodwill is the common example. Instead of a yearly write-off, you test these assets for impairment each year to check their value still holds up.

Amortisation vs depreciation

Amortisation and depreciation both spread an asset's cost over time, so they're easy to mix up. The difference comes down to the type of asset each one applies to.

Amortisation applies to intangible assets, the things you can't physically touch, such as patents and licences. Depreciation applies to tangible assets, the physical items like vehicles, equipment and machinery. The mechanics are similar, but keeping the two terms straight helps you record each asset in the right place.

Simplify asset amortisation with Xero

Tracking intangible assets and their yearly write-offs doesn't have to eat into your day. Xero brings your figures together in one place, so you can keep an eye on asset values and expenses without the manual admin.

See how Xero can help you stay on top of asset amortisation and the rest of your books, and get one month free.

FAQs on amortisation

Here are answers to some frequently asked questions about amortisation to help you apply it with confidence.

Is goodwill amortised?

No, goodwill isn't amortised because it's treated as having an indefinite useful life. Under IFRS, you test it for impairment each year instead.

Which accounting standard covers amortisation in South Africa?

Amortisation of intangible assets is governed by IFRS, specifically IAS 38. This is the standard that sets out how to recognise, measure and write off intangibles.

Can you amortise an asset for tax purposes?

Yes, you can claim amortisation as a deduction, subject to the South African Revenue Service rules for the asset in question. The amount you write off each year can reduce your taxable income.

What is negative amortisation?

Negative amortisation happens on a loan when your repayments don't cover the interest due. The unpaid interest is added to the balance, so the amount you owe grows rather than shrinks.

Related terms

• Intangible assets
• Assets
• Balance sheet
• Profit and loss statement

Learn more about amortisation

• What is depreciation?
• What is accumulated depreciation?
• Small business accounting
• Small business bookkeeping